Mention the property sector and I usually run a mile. But not on this occasion. One area that is resilient within the real-estate industry is the provision of maintenance services for social housing and home care. These are also inherently defensive in nature because most of this local authority spending is non-discretionary and results in almost zero bad debts.
Mears (LSE:MER)
This is where Mears steps in. It is a leading player in these two sectors with a £1.6bn order book and a buoyant pipeline of new projects. Its maintenance arm works under long-term contracts to take care of all the little niggles in council rented properties, including blocked drains, broken windows, detached tiles and broken-down boilers. For instance, in 2008 the firm won a ten-year contract worth £157m to carry out ongoing repairs on more than 30,000 houses run by Metropolitan Housing Trust.
Its domiciliary care arm employs 4,000 carers, often women working flexible hours, who call on residents designated by social services to provide the help they need. Its clients are typically elderly and infirm. Here Mears competes with the likes of Nestor Healthcare, Care UK and Claimar Care. Within the social housing sector, the competition includes Connaught and Kier.
The City expects 2009 sales and underlying earnings per share of £460m and 22.0p respectively, rising to £513m and 24.9p in 2010. That means the shares are trading on meagre p/e ratios of 9.6 and 8.5. That’s despite the fact that the company has a strong balance sheet, as well as having 89% and 54% of revenues already in the bag for the next two years. Yes, there are a few potential spanners, notably the normal dangers of working with the government (such as contract problems, delays and bureaucracy). But even so, with an election looming and the Bank of England breaking its back to stimulate the economy, I suspect there is far more upside than downside risk at current levels.
Recommendation: BUY at 212.25p (market capitalisation £157m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments